Putnam County deal shows way forward for mutual banks

Author: Zoe Thomas | Published: 13 Oct 2014

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Putnam County Savings Bank has taken the
unusual step of purchasing a Nasdaq-listed competitor in an
effort to protect its core business and meet growing
regulatory demand.

The deal was an all-cash transaction because Putnam is a
mutual savings bank, where the depositors are the beneficial
owners. Given this inability to raise capital through stock
offers, it is rare for mutual banks to be in a position to make
strategic acquisitions.

The deal demonstrates how some community banks are remaining
viable despite regulatory challenges by shaping long-term plans
that aren’t subject to quarterly shareholder
scrutiny.

"There are some limits on mutual banks, but they can
implement a strategic business plan without being subject to
the short-term demands of shareholders," said V Gerard Comizio,
a partner at Paul Hastings who acted for the target. "They
don’t have to live quarter to quarter because they
don’t have same demand on dividends and
performance."

The deal was structured to allow Putnam to strategically
merge with CMS, combining branches, employees and bringing
CMS’s director into the Putman board of
trustees.

Each of CMS’s shareholder received $13.25 in
cash per share. The total value of the transaction $25.4
million is lower than other bank mergers, but impressive given
that Putnam needed to have the cash available to complete the
deal.

KEY TAKEAWAYS

Putnam County Savings Bank has made a strategic
purchase of Nasdaq-listed competitor CMS;

The deal was an all-cash transaction because
Putnam is a mutual savings bank, where the depositors are the
beneficial owners;

The deal demonstrates how some community banks
are remaining viable despite regulatory challenges by shaping
long-term plans that aren’t subject to quarterly
shareholder scrutiny.

Market
consolidationThat Putnam had enough spare capital to make this
acquisition is rare.

There are still around 7000 community
banks in the US including commercial banks, thrifts, stock
and mutual savings banks, most of which hold $1 billion or less
in assets. In the early 1980s there were
18000 banks in the US.

The challenge
for community banks will be surviving the regulatory
and competitive environment in the next few years

"The challenge for community banks will be surviving the
regulatory and competitive environment in the next few years,"
Comizio said.

There has been ongoing consolidation in the
US banking market since the 1980s. The financial crisis and
subsequent increase of regulation has expedited that process
making it hard for smaller community banks to complete while
meeting increased capital requirements.

Regulatory strain Mutual banks have been offered some reprieve in
Dodd-Frank regulation such as exemptions in the mortgages
reform rule that
will position them to grant more loans outside the
qualified mortgage framework. This should allow these banks
to continue to grow within the local communities where they
have traditionally been strong.